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Basics: Vesting


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Articles (Jump to FAQs)

Stock Option Fundamentals (Part 2): Vesting And Expiration This is premium content

Marilyn Renninger
You cannot cash in your stock options immediately. The options must first be vested, and you don't own them forever.

Stock Option Terms: What You Can Expect This is premium content

Richard Friedman
UPDATES! Get a sense of what you should, and should not, expect in the terms of your stock option grant. A major survey of companies looks at trends in vesting schedules, post-termination exercise rules, and other plan features.


FAQ Table of Contents:


Basics

What is a vesting schedule?

A vesting schedule dictates when you may exercise your stock options or when the forfeiture restrictions lapse on restricted stock. Vesting is determined separately for each grant. A schedule is time-based if you must...

Why is vesting important to me?

Vesting is necessary to acquire company shares through the stock grant, and it is determined separately for each grant. Unless you complete the required service period at your company...

UPDATES! What is a typical vesting schedule? Do you have any data on vesting schedules and their design? This is premium content

Graded vesting is more common than cliff vesting. According to surveys, the most common vesting schedule for these grants is...

How are vesting schedules established? This is premium content

Vesting schedules are either established in advance by the board of directors when it approves the...

Are there different types of time-based vesting schedules? Which are most common? This is premium content

Yes. Vesting schedules provide for either "cliff" vesting or "graded" vesting...

Must all employees have the same vesting schedule? This is premium content

No, it is not required. Sometimes, a stock option plan will provide for a...

May I ask for a shorter vesting schedule? This is premium content

Yes, unless the vesting schedule is mandated by the...

Do technology companies use special vesting schedules? This is premium content

Yes. Technology companies, particularly pre-IPO companies, often have...

How much are my vested options worth? This is premium content

If you are vested in your stock options and they are currently exercisable...

If I remain with the company for the duration of the vesting schedule, is there any way I can lose the benefit of my option?

You could mistakenly let the options expire without exercising them. You do not have your vested options for life...

My restricted stock will vest soon. What must I do and decide? This is premium content

You have some decisions but fewer than you would with stock options, which prompt a decision about exercise timing and, if you hold the shares, require cash for the exercise and taxes. By contrast, restricted stock and restricted stock units...

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Rules

Does the law mandate any minimum vesting schedule? This is premium content

Federal law does not mandate a minimum period within which your options must vest. For private companies, the laws of certain states...

I have various stock option grants with vested options. Do I need to exercise first my oldest grants or my oldest vested options?

There's no requirement for which vested options you must exercise first. The decision of which options to exercise first is part of your...

What service counts toward vesting? This is premium content

Unlike in some benefit plans, service for time-vested option and restricted stock grants is rarely...

Does service with a previous employer ever count toward vesting? This is premium content

Not usually. An exception would occur if your...

How does the vesting of stock options for consultants and contractors differ from the vesting of grants to employees? This is premium content

Almost all grants to W-2 employees base vesting on...

Once my in-the-money options vest, are they mine forever? This is premium content

No. You could lose them in any of the following ways...

When I am still working at my company, can it rescind, cancel, or reduce the size of my grant before vesting instead of firing me?

Not unilaterally. Although no law specifically addresses this question, courts have examined...

Can my company fire me or reduce the size of my grant just before the vesting of my stock options or restricted stock/RSUs?

In short, yes, assuming this termination is made for good-faith reasons, such as business downsizing. Most employees are "at will," which means...

Does vesting continue while I am on a leave of absence or a sabbatical? This is premium content

This depends on the terms of your company's plan document and your grant agreement as well as on the reason for the absence. Some plans give you vesting credit for...

How does a call to active military duty affect stock grants?

The impact is determined by your stock plan. Some plans have provisions on what happens to outstanding options upon an approved leave of absence...

Does the reason for my leave of absence or sabbatical affect vesting? This is premium content

Yes, according to the terms of your stock grant and any flexibility given by your plan administrator. Usually you...

Does maternity leave stop my vesting? This is premium content

Companies either include maternity in their short-term disability policy (and suspend vesting, regardless of the reason for the short-term leave) or...

How do unpaid vacations and shutdowns affect vesting schedules? This is premium content

Always check your stock-plan documents for any guidance on this type of situation...

What happens to vesting if I am transferred to a subsidiary? This is premium content

Typically, your service to the subsidiary continues to count...

What happens to vesting if I leave to work for a joint venture? This is premium content

If your company does not own a controlling interest in the joint venture, this could be considered a termination of employment...

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Acceleration

After I retire, will my company let my stock options or restricted stock continue to vest, or will it accelerate the vesting? This is premium content

Most likely, retirement will cause your company to do neither. Retirement is a type of termination of employment under your stock plan. Only a small minority of companies either let the stock options continue to...

Is the original vesting schedule ever accelerated by reaching performance milestones or special goals? This is premium content

Some companies accelerate the vesting schedule of restricted stock or RSUs if...

UPDATES! What types of company goals are most commonly set for performance shares and units? What do surveys show about the performance metrics and periods that companies use? This is premium content

Stock-based performance plans have targets that, when reached by the end of the measurement period, trigger vesting or payout according to the structure of the plan. Various surveys show that the most common metrics are...

UPDATES! Can my stock option grant be designed to vest only when certain performance targets are reached? This is premium content

In these grants the exercise price is equal to the fair market price on the grant date, but the grant vests only when certain targets, such as...

What is an example of a performance goal that triggers or accelerates vesting? This is premium content

Successful completion of venture financing is a typical performance goal for a startup company. A public company might...

What portion of unvested options is normally accelerated in a change of control? This is premium content

Typically, stock option vesting is accelerated in some way in a change of control. Depending on your stock plan...

Can I negotiate faster vesting later while I am working for the company?

If a company makes a grant with a specific vesting schedule and the schedule is later shortened from its original terms, the accountants will usually...

Can the terms of my severance accelerate vesting or give me a longer period to exercise my options? This is premium content

You can try for this in your severance agreement. Companies occasionally do this for all employees in special situations. But...

Would my death automatically accelerate the vesting of my stock grants?

The treatment varies by company and stock plan. You should check your...

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Job Events

What happens to the vesting of my grant if I switch from full-time to part-time work? This is premium content

Most employers do not adjust the vesting schedule. However, companies may feel that...

I am leaving my job. Is my company required to tell me how many vested options I have, how long I can exercise them after I leave, or when they expire? This is premium content

No law requires this. It is your obligation to know these details. Court cases show that...

If I lose my job but I am then rehired, can unvested stock options be reinstated, or can the exercise period of my vested options be extended to the end of the original term? This is premium content

While being rehired is great news, the bad news is that the unvested options were canceled or forfeited when you were laid off, regardless of the reason for termination. As for the vested options...

According to surveys, how are unvested stock options most commonly treated upon various types of termination? This is premium content

In its 2013 Domestic Stock Plan Design Survey, the National Association of Stock Plan Professionals found that the following treatments of options at termination are most common...

What happens if I terminate my employment before an option grant is fully vested?

If your option was granted with a graded vesting schedule, you are allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder...

Does the reason for my termination affect vesting?

Yes. Stock plans often have different provisions on post-termination exercise periods for vested options, on any acceleration of vesting, and on the treatment of...

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Advanced

Can I use my vested employee stock options as collateral for selling call options on my company stock? This is premium content

It has become easier to sell call options on your vested employee stock options. This creates both an income-producing opportunity and a hedging strategy, if you are allowed to do this and you understand the risks...

When does my holding period for capital gains begin? At exercise or vesting?

The holding period to determine whether a capital gain is long-term or short-term starts on the...

When does my holding period for the special tax rate on dividends begin? At exercise or vesting? This is premium content

The holding period to determine whether a dividend is qualified and thus taxed at a lower rate starts on...

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